Risks and rewards in private investing

Many of our great Kiwi companies serving consumers and businesses have worked with private equity investors at some stage, including Manuka health. Photo / Grant Johnston

Running a privately-owned business is hard work; and mostly rewarding. Investing in privately-owned businesses is also hard work and mostly rewarding.

Private market investment comes in many forms. Starting your own businesses as an entrepreneur is essentially private equity investing. Just as buying into a business that is not publicly listed is private equity investing.

New Zealanders understand private business ownership. We are a nation of private businesses. And most of the businesses that employ Kiwis and earn export revenues are privately-owned. Many of our bigger businesses are also privately owned.

The New Zealand Private Equity and Venture Capital Association (NZVCA) estimates that of the New Zealand companies with annual revenue exceeding $20 million and involved in productive activity, there are roughly 80 that are listed companies but more than 800 that are not listed or are privately-owned.

Investing in privately-owned businesses can be rewarding. And you don’t need to be a billionaire to get a piece of the action.

Public servants in California are well-served by CalPERS, a large superannuation fund investing for the future of the public servants in California. CalPERS chief investment officer Ted Eliopoulos reports that “private equity has the highest net returns in our portfolio” (CalPERS, November 24, 2015).

Private equity investment in mid-market companies globally provide returns that consistently exceed public listed equivalents.

Cambridge Associates and the Australian Private Equity and Venture Capital Association report a quarterly index that shows that “on average, the private equity and venture capital asset class delivers returns of about 4 per cent above listed markets, measured over the medium to long-term”. The data that we have on the New Zealand market is essentially similar.

But private equity investing in privately owned businesses is hard work. Not every investor is willing to do the hard yards and take the risk. Private equity fund managers add capital and skills to help owners build better businesses.

The ANZ Privately-owned Business Barometer survey identified that “capital and skills” was a prevalent constraint to business growth. Fifty per cent of respondents identified “strategy” at the board level as a key skill needed for future growth.

One respondent said “We have some great ideas, but lacking capital and experience”. New Zealand is fortunate to have some reputable private equity funds working with business owners.

Many of our great Kiwi companies serving consumers and businesses have worked with private equity investors at some stage. Some of the familiar names are Scales Corporation, Bell Tea, Orion Health, Tegel and Manuka Health. There are many more.

So how can you get a piece of the action? As New Zealand taxpayers we all have an interest in some private-owned business through the investment portfolio of the NZ Super Fund.

Strangely, as a KiwiSaver member we are unlikely to have any investment in private equity. It is difficult to understand why the high rewards of private equity are not realised by some fund managers for the benefit of their members.

Private equity employs a structure that aligns the interests of investors, fund managers and company management. If the company performs well, everyone does well.

As the CalPERS report attests, investors are rewarded and some of the reward is shared with the people who help create the value.

If you want to share in the rewards you need to understand the risks. With eyes wide open and a willingness to do some work you could start by asking your financial adviser how to access private equity investments.

Colin McKinnon is executive director, New Zealand Private Equity & Venture Capital Association. colin.mckinnon@nzvca.co.nz